This morning I was privileged to attend a special summit held by Beacon Economics’, Dr. Christopher Thornbergâ€™s. Energy and excitement filled the room as we reviewed both San Diego and Californiaâ€™s Real Estate market and what to expect going forward. Below you can find a summary of interesting highlights and insight towards what we can expect in the coming months.
Itâ€™s important to note, that government policy remains one of the greatest inhibitors of the proposed accuracy of any forecast going forward. Its argued the previous quarters performance is largely artificial and due to massive government interventions to stimulate demand and restrict supply.
Artificial Supply and Demand
FHA– FHA loans account for 30% of all loans in California, With as little as 3-4% down and a possible $18,000 federal/state blended tax credit, first home owners have the ability to net a gain when purchasing a houseâ€¦Fundamentals don’t apply!
HEMP program-Home Affordable Modification Program- proposed to modify mortgages for individuals to stay in there homes, aims at restricting supply, however its estimated only 10% are successful (Surprise?)
California is a boom or bust state, we typically perform very well with the national economy and tend to underperform at greater lengths when the broader US economy is performingÂ poorly.
Dr. Thornberg argues the trends are pointing California in the right direction, but the fundamentals donâ€™t support the claims. We all must be very cognizant of the relationship between fundamentals and historical trends. Itâ€™s at the point where the two variables support the same notions that forecast can be estimated with more confidence.
A staggering fact, on a macro level-Itâ€™s estimated that 12 million homes nationwide are underwater. i.e.. the loan on the home is worth more than the home itself.
So what can we expect?
Well Dr. Thornberg didn’t provide a crystal ball accompanied with a 95% confidence interval, however he did mention multiple times that 2010 is going to be a good year, Artificial but good. Organic recovery, mixed with a steroid shot, of economic stimulus will bring more money to the markets, increase spending, and most likely decrease savings. On a macro level this is good for the short term, but possibly devastating for the long run. Dr. Thornberg poignantly notes that although 2010 will most likely be a solid year, we should all be very cautious not to overextend for 2011 and 2012.
#1 Total Financial markets, The markets have been an interesting indicator of poor fundamentals for quite some time. From Feb 09- March 2010, international equity markets cumulatively experienced a 71% increase in value accounting for $22 trillion dollars. â€¦..Its important to note, no one knows where this â€œMONEY, would be coming from, and thus I argue fundamentally unsound.)
#2 Inflation, the ball demand could go either way, To date the Fed has expanded the monetary base by 1.3 trillion dollars, a majority going to excess bank reserves to insure liquidity. However point being $1.3 trillion accounts for a 150% increaseâ€¦Amortized over the next 5 years. almost 30% a year is quite significant and obviously apparent.
#3. Federal Debts– I Donâ€™t want to relate the US to Greece, however as it stands U.S gov is borrowing $ 4 Billion/Day, 11% of GDP per year. TheÂ gross national debt is 85% of value. Be aware.
In Summary, 2010 will be good, however donâ€™t overextend, be cautious, patient and frugal.
We can all still learn for Sir Benjamin Franklinâ€™s wise words:
â€œHe that is rich need not live sparingly, and he that can live sparingly need not be rich.â€